Accounting, Organizations and Society 31 (2006) 529–558

www.elsevier.com/locate/aos

Management control systems and strategy:

A resource-based perspective
¤
Jean-François Henri
École de comptabilité, Université Laval, Qué., Canada G1K 7P4

Abstract

The aim of this study is to examine, from a resource-based perspective, the relationships between the use of manage-
ment control systems (MCS) and organizational capabilities. More speciWcally, the study focuses on the diagnostic and
interactive uses of one important aspect of MCS, namely performance measurement systems (PMS), and four capabili-
ties leading to strategic choices (i.e., market orientation, entrepreneurship, innovativeness, and organizational learning).
Three research questions are investigated in this study: (i) to what extent do the diagnostic and interactive uses of MCS
contribute speciWcally to the creation and maintenance of capabilities leading to strategic choices? (ii) To what extent do
the diagnostic and interactive uses of MCS act in combination to produce dynamic tension which contributes to the cre-
ation and maintenance of these capabilities? (iii) To what extent does the use of MCS contribute to organizational per-
formance? The results suggest that an interactive use of PMS fosters the four capabilities by focusing organizational
attention on strategic priorities and stimulating dialogue. Also, by creating constraints to ensure compliance with
orders, the diagnostic use of PMS exerts negative pressure on these capabilities. Furthermore, some evidence suggests
the inXuence of dynamic tension resulting from the balanced use of PMS in a diagnostic and interactive fashion on
capabilities and performance.
© 2005 Elsevier Ltd. All rights reserved.

Introduction learning, market orientation and entrepreneurship

In the current business environment charac-
terized by fast changes in customers, technologies
and competition, organizations need to continu-
ously renew themselves to survive and prosper
(Danneels, 2002). Innovativeness, organizational
*
Tel.: +1 418 656 7737; fax: +1 418 656 7746.
E-mail address: jean-francois.henri@ctb.ulaval.ca
are recognized as primary capabilities to reach
competitive advantage (Hult & Ketchen, 2001;
Hurley & Hult, 1998; Ireland, Hitt, Camp, & Sex-
ton, 2001). Over the past 15 years, the resource-
based view (RBV) of the Wrm on the origins of
competitive advantage has become a very inXuen-
tial framework and one of the standard theories in
the Weld of strategy (Barney, Wright, & Ketchen,
2001; Hoopes, Madsen, & Walker, 2003). The RBV

0361-3682/$ - see front matter © 2005 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2005.07.001
530 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
is based on the principle that competitiveness is a
function of distinctive and valuable resources and
capabilities controlled by a Wrm. Despite consider-
able interest in the relationship between manage-
ment control systems (MCS) and strategy, the
MCS literature has devoted scant attention to the
RBV. This study seeks to extend the research at
the interface between MCS and strategy with the
application of an RBV framework.
So far, a signiWcant body of literature has
explored the eVects of strategy on MCS and, to a
lesser extent, the eVects of MCS on strategy (Dent,
1990; LangWeld-Smith, 1997; Shields, 1997). A Wrst
line of research has emphasized the eVects of strat-
egy on MCS. The concept of strategy has been gen-
erally examined at a strategic-choice level: (i)
market positioning: cost leadership versus diVeren-
tiation (e.g. Bruggeman & Stede, 1993; Govindara-
jan, 1988; Govindarajan & Fisher, 1990), (ii)
strategic pattern: prospector versus defender (e.g.
Abernethy & Guthrie, 1994; Hoque, 2004; Simons,
1987), (iii) strategic mission: build, hold, harvest
(e.g. Govindarajan & Gupta, 1985; Merchant,
1985), or (iv) strategic priorities: customization,
quality, Xexibility, etc. (e.g. Abernethy & Lillis,
1995; Chenhall & LangWeld-Smith, 1998; Baines &
LangWeld-Smith, 2003; Ittner, Larcker, & Randall,
2003).
These conceptualizations generally take strat-
egy as a given, consider it from a content perspec-
tive (Fahey & Christensen, 1986), and restrict its
scope to the notion of intended strategy (Mintz-
berg & Waters, 1985).1 In these studies, MCS are
considered for the most part to be strategy-imple-
mentation systems and the last step in the strate-
gic-management process. This conceptualization of
MCS follows a structural approach whereby the
perspective is static and the focus is placed on such
issues as the presence or absence of speciWc sys-
tems, their technical properties and their design
(Chapman, 1997, 1998; Dent, 1987).
1
Based on the work of Mintzberg and Waters (1985) “intend-
ed” strategies are distinguished from “emergent” strategies. The
former are associated with precise intentions by the organiza-
tion and occur before action, while the latter reXect the absence
of intentions and occur during action. Both types can lead to
the notion of “realized strategies”.
A second line of research has emphasized the
eVects of MCS on strategy. The concept of strategy
has also been examined at a strategic-choice level
and, to a lesser extent, at a capabilities level. First,
a number of studies have examined strategy at a
strategic-choice level: (i) strategic priorities (e.g.
Chenhall, 2005; Marginson, 2002), and (ii) strate-
gic change (e.g. Abernethy & Brownell, 1999;
Chenhall & LangWeld-Smith, 2003). Other studies
refer indirectly to strategy at a capabilities level in
terms of innovation or organizational learning (e.g.
Bisbe & Otley, 2004; Davila, 2000; Kloot, 1997).
These conceptualizations consider strategy as
being inXuenced by MCS, consider it from a pro-
cess perspective (HuV & Reger, 1987), and expand
its scope to the notion of emergent strategy
(Mintzberg & Waters, 1985). In these studies, the
role of MCS in the formulation of strategy is rec-
ognized as well as their continuous implication
during the strategic-management process. This
conceptualization of MCS follows a processual
approach whereby the perspective is dynamic and
the focus is on such issues as the dialogue and
interaction surrounding the use of MCS (Chap-
man, 1997, 1998; Dent, 1987).
Numerous authors have pointed out that the
Wndings provided by the MCS-strategy stream of
research remain ambiguous and sometimes contra-
dictory (e.g. Abernethy & Brownell, 1999; Chap-
man, 1997; Chenhall, 2003; Ittner et al., 2003;
LangWeld-Smith, 1997). These ambiguous results
can be attributed in part to the various deWnitions,
conceptualizations and operationalizations of
strategy and MCS (Kald, Nilsson, & Rapp, 2000;
LangWeld-Smith, 1997; Simons, 1990). They can
also be explained by two elements: (i) the absence
of a theoretical framework founded on the
resource-based view, and (ii) the limited attention
devoted to the dynamic tension resulting from
diVerent uses or roles of MCS.
First, the relationship between MCS and strat-
egy may not have been studied at the right level of
analysis. As suggested by Ittner and Larcker
(2001), one key element in studying strategy and
MCS is to identify the speciWc factors that do in
fact lead to strategic success. Following the RBV,
the link between strategy and MCS may occur at
the capabilities level rather than the strategic-
 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
choice level. The RBV rests on the principle that
competitiveness is a function of the strength,
expert exploitation, and leveraging of speciWc
internal resources and capabilities controlled by a
Wrm (Lengnick-Hall & WolV, 1999). These
resources and capabilities are distinctive, valuable,
and must be protected from imitation, adoption, or
substitution by competitors to create a sustainable
competitive advantage (Barney, 1991; Wernerfelt,
1984). They support strategic choices by providing
the competitive advantage necessary to materialize
these choices. MCS must be aligned with capabili-
ties to be eVective and consistent with strategic
choices. Hence, the notion of strategic choice itself
may not be directly traceable to MCS. Instead, the
relationship should be examined between capabili-
ties and MCS, rather than between strategic choice
and MCS.
Second, the traditional role of MCS in the
implementation of strategy is commonly recog-
nized (e.g. Andrews, 1971; AnsoV, 1965; Anthony,
1965). Following the work of Simons (Simons,
1990, 1991, 1994, 1995), several studies have exam-
ined a more active role of MCS in the formulation
of strategy and the implementation of strategic
change (e.g. Abernethy & Brownell, 1999; Bisbe &
Otley, 2004; Chenhall & LangWeld-Smith, 2003).
Another line of research describes how the organi-
zations balance the traditional and more active
roles of MCS (e.g. Ahrens & Chapman, 2004;
Chapman, 1998; Dent, 1987; Haas & Kleingeld,
1999). However, less attention has been devoted to
the eVects of dynamic tension resulting from the
balance use of MCS in various ways. Notable
exceptions are the work of Chenhall and Morris
(1995) and Marginson (2002). While the former
has examined the joint eVect of organic processes
and formal MCS on performance, the latter has
used the model of Simons to report some trade-oVs
resulting from the various uses of MCS. A more
complete understanding of the relationships
between MCS and strategy requires the integration
in the theoretical and empirical analyses of both
traditional and more active roles of MCS, as well
as the tension resulting from those uses.
Building on the work of Simons, this study aims
to examine, from a resource-based perspective,
how the use of MCS by top management team can
531
act as an antecedent to organizational capabilities
leading to strategic choices. SpeciWcally, this study
focuses on the traditional feedback role of MCS to
support the implementation of strategy (‘diagnos-
tic use’) and the more active role of MCS associ-
ated with the signals sent throughout the Wrm to
focus organizational attention, stimulate dialogue
and support the emergence of new strategies
(‘interactive use’). These two types of use work
simultaneously but for diVerent purposes. Collec-
tively, their power lies in the tension generated by
their balanced use which simultaneously reXects a
notion of competition and complementarity.
Hence, three speciWc research questions are
investigated in this study: (i) To what extent do the
diagnostic and interactive uses of MCS contribute
speciWcally to the creation and maintenance of
capabilities leading to strategic choices? (ii) To
what extent do the diagnostic and interactive uses
of MCS act in combination to produce dynamic
tension which contributes to the creation and
maintenance of these capabilities? (iii) To what
extent does the use of MCS contribute to organiza-
tional performance? A theoretical model is devel-
oped and tested with empirical data gathered from
a survey.
The remainder of this paper is organized as fol-
lows. The next section brieXy examines the
resource-based view and the use of MCS following
the model of Simons. Thereafter, a theoretical
model is developed and a set of hypotheses is pre-
sented. The next two sections include a description
of the survey design, the analysis of the data using
structural equation modelling and a discussion of
the results. The Wnal section presents the theoreti-
cal contributions, practical implications, limita-
tions and insights for future research.
Theoretical framework
DeWnition of constructs
Resource-based view and capabilities
The RBV conceptualizes Wrms as bundles of
resources heterogeneously distributed across Wrms,
and that resource diVerences persist over time
(Amit & Schoemaker, 1993; Wernerfelt, 1984).
532 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
Resources that are valuable, rare, inimitable and
non-substitutable lead to the achievement of sus-
tainable competitive advantage that cannot be eas-
ily duplicated by competitors (Barney, 1991).
Resources include various elements that can be
used to implement value-creating strategies: spe-
ciWc physical assets (e.g., specialized production
facilities, geographic location), human resources
(e.g., engineering experience, expertise in chemis-
try), organizational assets (e.g., management skills,
superior sales force), and competencies (e.g., minia-
turization, imaging) (Barney, 1991; Eisenhardt &
Martin, 2000; Teece, Pisano, & Shuen, 1997).2
Capabilities forge a link between resources and
permit their deployment (Day, 1994). They are the
organizational processes by which Wrms synthesize
and acquire knowledge resources, and generate
new application from those resources (Kogut &
Zander, 1992). Formally stated: “The Wrm’s pro-
cesses that use resources—speciWcally the processes
to integrate, reconWgure, gain and release
resources—to match and even create market
change. Dynamic capabilities thus are the organi-
zational and strategic routines by which Wrms
achieve new resource conWgurations as market
emerge, collide, split, evolve, and die.” (Eisenhardt
& Martin, 2000, p. 1107).
Innovation, organizational learning, market ori-
entation and entrepreneurship are recognized as
primary capabilities to reach competitive advan-
tage, to match and create market change. Past
research suggests that each of these four capabili-
ties is adequate to oVer strengths, but is not suY-
cient to develop sustained advantages. Only
collectively can they help a Wrm to be uniquely
competitive (Bhuian, Menguc, & Bell, 2005; Hult &
Ketchen, 2001; Hurley & Hult, 1998; Ireland et al.,
2001). Hence, this paper investigates the inXuence
of MCS on each of these four capabilities.
First, innovativeness refers to the notion of the
organization’s openness to new ideas, products
and processes, and its orientation toward innova-
tion (Hurley & Hult, 1998). Innovation is consid-
2
The resources must be distinguished from factors of produc-
tion which are undiVerentiated inputs available in disaggregate
form in factor markets, such as land, unskilled labour and capi-
tal.
ered by many scholars and managers to be critical
for Wrms to compete eVectively in domestic and
global markets, and one of the most important
components of a Wrm’s strategy (Hitt, Ireland,
Camp, & Sexton, 2001). Firms that have a greater
capacity to innovate are able to develop a competi-
tive advantage, achieve corporate renewal and
achieve higher levels of performance (Danneels,
2002; Hurley & Hult, 1998).
Second, organizational learning refers to the
development of insights, knowledge and associa-
tions among past actions, the eVectiveness of these
actions, and future actions (Fiol & Lyles, 1985). An
organization’s ability to survive and grow is based
on advantages that stem from capabilities that rep-
resent collective learning (Nevis, Dibella, & Gould,
1995). Learning is considered to be an important
facilitator of competitive advantage by improving
a Wrm’s information processing activities at a faster
rate than rivals do (Baker & Sinkula, 1999).
Third, market orientation refers to the organi-
zational emphasis on customers’ expressed needs
and on the development of long-term thinking
based on customers’ latent needs (Slater & Narver,
1998; Slater & Narver, 1999). It speciWcally relates
to three components, namely customer orientation,
competitor orientation and inter-functional coor-
dination. Market orientation eVectively and
eYciently creates the necessary behaviors for the
creation of superior value for customers, and thus,
continuous performance for the business (Kohli &
Jaworski, 1990; Narver & Slater, 1990).
Fourth, entrepreneurship refers to the ability of
the Wrm to continually renew, innovate, and con-
structively take risks in its markets and areas of
operation (Miller, 1983; Naman & Slevin, 1993).
Entrepreneurial actions entail creating new
resources or combining existing resources in new
ways to develop and commercialize new products,
move into new markets, and/or service new custom-
ers (Hitt et al., 2001). Entrepreneurship is identiWed
as a critical organizational process that contributes
to Wrm survival and performance (e.g., Barringer &
Bluedorn, 1999; Hitt et al., 2001; Miller, 1983).
Use of management control systems
MCS are deWned as formalized procedures and
systems that use information to maintain or alter
 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
patterns in an organizational activity (Simons,
1987). This deWnition includes planning systems,
reporting systems, and monitoring procedures that
are based on information use. In this study, one
component of MCS is examined, namely the per-
formance measurement systems (PMS). The latter
represent a set of metrics used to quantify actions
(Neely, Gregory, & Platts, 1995). These metrics can
be Wnancial or non-Wnancial, internal or external,
short or long term as well as ex post or ex ante.
Simons’ framework on the levers of control
(Simons, 1990, 1991, 1994, 1995) relies on the con-
cept of tension. The essence of MCS is to manage
the inherent organizational tension between creative
innovation and predictable goal achievement.
More speciWcally, three kinds of inherent tension
must be reconciled and balanced to allow the eVec-
tive control of business strategy: (i) unlimited
opportunity versus limited attention, (ii) intended
versus emergent strategy, and (iii) self-interest and
desire to contribute. Managers use MCS as posi-
tive and negative forces to create dynamic tension
that contributes to manage inherent organizational
tension.
The diagnostic use of MCS represents the tradi-
tional feedback role as MCS are used on an excep-
tion basis to monitor and reward the achievement
of pre-established goals. Following a traditional
mechanistic notion of control, a diagnostic use
provides motivation and direction to achieve goals
by focusing on and correcting deviations from pre-
set standards of performance. The diagnostic use
comprises the review of critical performance vari-
ables (i.e., factors enabling the achievement of
intended strategy) to monitor and coordinate the
implementation of intended strategies. It repre-
sents a negative force for two reasons. On the one
hand, diagnostic use focuses on mistakes and nega-
tive variances. On the other hand, the sign of the
deviation that is derived when outputs and goals
are compared is reversed in the feedback signal to
adjust the process.
The interactive use of MCS represents a positive
force as MCS are used to expand opportunity-
seeking and learning throughout the organization.
The interactive use focuses attention and forces
dialogue throughout the organization by reXecting
signals sent by top managers. It stimulates the
533
development of new ideas and initiatives and
guides the bottom–up emergence of strategies by
focusing on strategic uncertainties (i.e., contingen-
cies threatening or invalidating underlying
assumptions of current strategies). When MCS are
used interactively, (i) the information generated is
a recurrent and important agenda for top manag-
ers; (ii) frequent and regular attention is fostered
throughout the organization; (iii) data are dis-
cussed and interpreted among organizational
members of diVerent hierarchical levels; and (iv)
continual challenge and debate occur concerning
data, assumptions and action plans.
Diagnostic and interactive uses of MCS, includ-
ing PMS, represent two complementary and nested
uses. They work simultaneously but for diVerent
purposes. While diagnostic use represents a mecha-
nistic control used to track, review and support the
achievement of predictable goals, interactive use is
an organic control system supporting the emer-
gence of communication processes and the mutual
adjustment of organizational actors. SpeciWcally, a
diagnostic use limits the role of PMS to a measure-
ment tool, while an interactive use expands its role
to a strategic management tool (Kaplan & Norton,
2001). According to Simons, diagnostic and inter-
active uses of MCS represent countervailing forces
used to balance the inherent organizational ten-
sion. Haas and Kleingeld (1999) point out that
diagnostic use of PMS may not be an end in itself
but a means necessary to initiate strategic dialogue
and interactive use of PMS. Referring to Argyris
and Schön (1978b), diagnostic use represents sin-
gle-loop learning and acts as a prerequisite for
interactive use and double-loop process. Thus, the
use of MCS (and PMS) ranges from mostly diag-
nostic to a combination of diagnostic and interac-
tive.
The joint use of MCS in a diagnostic and inter-
active fashion to manage inherent organizational
tensions creates dynamic tension. Dynamic tension
denotes contradictory but interrelated elements
(Lewis, 2000). Formally stated, tension can be deW-
ned as two phenomena in a dynamic relationship
that involve both competition and complementar-
ity (English, 2001). The joint use of PMS in a diag-
nostic and interactive manner creates dynamic
tension reXecting competition (positive versus
534 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
negative feedback) and complementarity (focus on
intended and emergent strategies). The notion of
dynamic tension is not necessarily new in the aca-
demic literature, and is related to other terms such
as conXict, paradox, dilemma, and contrast
(English, 2001). For instance, some authors have
examined the paradox related to the propensity to
seek risk and innovation while simultaneously exe-
cuting a safe and incremental implementation (e.g.
Bourgeois & Eisenhardt, 1988; Cameron, 1986).
Other studies have examined conXicts in the use
and implementation of control and cost systems
(e.g. Barrett & Fraser, 1977; Chenhall, 2004;
Shank, Niblock, & Sandalls, 1973). As suggested
by the conXict literature, tension is not necessarily
negative but instead may be beneWcial to organiza-
tions (DeDreu, 1991; Nicotera, 1995). This study
investigates the inXuence of the dynamic tension
resulting from the joint use of PMS in a diagnostic
and interactive fashion on capabilities leading to
strategic choices.
Theoretical model and hypotheses
Fig. 1 presents a summary of the theoretical
model that reXects the relationships among two
PMS use (diagnostic and interactive), four capabil-
ities (innovativeness, organizational learning, mar-
ket orientation and entrepreneurship), and
organizational performance. As previously men-
tioned, the aim of this paper is to understand the
PMS diagnostic use H1
(-) Market
orientation
H2
(+)
PMS interactive use CAPABILITIES
H3
(+)
Organizational
Dynamic tension learning
Diagnostic * Interactive
Fig. 1. Theoretical model.
speciWc and joint contributions of two complemen-
tary uses of PMS on capabilities and performance.
Consequently, the theoretical model considers the
individual eVect of diagnostic and interactive uses
separately, as well as their collective eVects. When
examined speciWcally, a diagnostic use is expected
to have a negative inXuence on the four capabili-
ties, while interactive use is expected to have a pos-
itive impact on these capabilities. Furthermore, the
balanced use of PMS in a diagnostic and interac-
tive fashion results in dynamic tension. This ten-
sion is expected to contribute positively to the four
capabilities by ensuring that positive eVects of
interactive use will be achieved and by expanding
these positive eVects. Lastly, PMS use is expected
to have an indirect eVect on organizational perfor-
mance through the four capabilities. These rela-
tionships are discussed speciWcally below.
Relationships between diagnostic use and
capabilities
In the management of inherent organizational
tension between creative innovation and predict-
able goal achievement, diagnostic use of PMS sup-
ports the attainment of pre-established goals.
Indeed, diagnostic use is described as a negative
force that creates constraints and ensures compli-
ance with orders: “[Diagnostic systems] constrain
innovation and opportunity-seeking to ensure pre-
dictable goal achievement needed for intended
strategies” (Simons, 1995, p. 91). Traditional PMS
Entrepreneur-
ship
H4
(+) Organizational
performance
Innovative-
ness
 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
encourage conservatism and a “playing it safe”
attitude: “Managers need to be encouraged to
identify deWned areas within which a degree of
experimentation and risk-taking might be beneW-
cial. Too often we stiXe creativity and learning by
insisting upon good performance from all activi-
ties” (Otley, 1994, p. 297).
Relying on cybernetic logic and reXecting tradi-
tional control systems, diagnostic use of PMS may
not represent an adequate means to foster capabil-
ities of market orientation, entrepreneurship, inno-
vativeness and organizational learning. Diagnostic
use reXects two important features associated with
mechanistic controls: (i) tight control of operations
and strategies, and (ii) highly structured channels
of communication and restricted Xows of informa-
tion (Burns & Stalker, 1961). Globally, there is a
mismatch between the requirements of the four
capabilities and mechanistic use of control systems
(Chenhall & Morris, 1995; Galbraith, 1982).
First, diagnostic use is associated with tight con-
trol of operations and strategies through sophisti-
cated control systems. These systems include
action plans derived from strategies, detailed Wnan-
cial targets, comparison of actual outcomes with
targets, and explanation of variances. This formal
use of PMS provides a mechanistic approach to
decision making resulting in organizational inat-
tention to shifting circumstances and the need for
innovation (Van de Ven, 1986). Furthermore, the
concept of organizational learning encompasses
the notion of single- and double-loop learning
(Argyris & Schön, 1978a). Diagnostic use repre-
sents single-loop learning but not the higher level
learning (double-loop), which is necessary for
innovative behaviors (Haas & Kleingeld, 1999).
Also, the four capabilities may create an organiza-
tional momentum leading to innovative excess,
overzealous experimentation and diminished
returns. Diagnostic use of PMS is used to signal
when productivity and eYciency have fallen, and
when innovation needs to be curbed (Miller &
Friesen, 1982). Hence, PMS is used diagnostically
to limit the deployment of the four capabilities by
providing boundaries and restrict risk-taking.
Lastly, as a mechanistic control, diagnostic use has
been associated with several dysfunctional behav-
iors based on distortion of information: gaming,
535
smoothing, biasing, focusing, Wltering, and illegal
acts (Birnberg, Turopolec, & Young, 1983; Hofst-
ede, 1978; Simons, 1995). These distortions consti-
tute defensive routines that aim to reduce potential
embarrassment or threat, or to improve personal
interest. They consequently impede the potential
for learning and innovation (Argyris, 1990).
Second, diagnostic use of PMS is associated
with highly structured channels of communication
and restricted Xow of information. However,
notions of communication and dialogue gravitate
towards the four capabilities. They rely on cross-
functional processes, and thus require the free Xow
of information and open channels of communica-
tion (Kohli & Jaworski, 1990). Diagnostic use
undercuts the commitment of organizational
actors to these cross-functional processes by rein-
forcing the existing lines of authority and responsi-
bility (Abernethy & Brownell, 1999). As
Vandenbosch (1999) argued, the discussion trig-
gered by the diagnostic use leads to corrective
action at best. At worst, it causes discussion to
gravitate towards unproductive topics, such as the
believability of the numbers or why things are not
better, and ultimately does not trigger any action.
Corrective actions are not suYcient to sustain such
capabilities; new ideas must be developed. These
arguments lead to the following hypothesis:
Hypothesis 1. A diagnostic use of PMS tends to
negatively inXuence capabilities of market orienta-
tion, entrepreneurship, innovativeness and organi-
zational learning.
Relationships between interactive use and
capabilities
In the management of inherent organizational
tension between creative innovation and predict-
able goal achievement, interactive use of PMS sup-
ports the development of ideas and creativity.
Indeed, interactive use has the power to represent a
positive trigger that fosters creative and inspira-
tional forces: “ƒsenior managers use interactive
control systems to build internal pressure to break
out of narrow search routines, stimulate opportu-
nity-seeking, and encourage the emergence of new
strategic initiatives” (Simons, 1995, p. 93). Accord-
ing to Dent (1990), curiosity and experimentation
536 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
can be fostered by control systems. Planning and
control systems could create new images of the
organization for employees as the organization
interacts with its environment. Thus, obsolete par-
adigms and organizational attempts can be uncou-
pled (unlearning) and recoupled in diVerent ways
(learning).
Relying on organizational dialogue and signal-
ing, interactive use of PMS represents an adequate
means to foster capabilities of market orientation,
entrepreneurship, innovativeness and organiza-
tional learning. Interactive use reXects two impor-
tant features associated with organic controls: (i)
loose and informal control reXecting norms of
cooperation, communication and emphasis on get-
ting things done, and (ii) open channels of commu-
nication and free Xow of information throughout
the organization (Burns & Stalker, 1961). Globally,
there is a natural Wt between the requirements of
the four capabilities and organic use of control sys-
tems (Chenhall & Morris, 1995; Van de Ven, 1986).
Capabilities of innovativeness, organizational
learning, entrepreneurship and market orientation
lead to complexity and changes in product design.
This context requires the employment of experts in
the process of creation and implementation of new
product design (Burns & Stalker, 1961; Mintzberg,
1979). The collaboration of experts and managers
from diVerent functional areas is needed to foster
innovation and new product development (Miller,
1988). Reciprocal interdependencies are then
expected from the people who need to be in close
contact (Galbraith, 1973). Also, this context of
complexity and change brings uncertainty and
ambiguity for the sub-ordinates as top manage-
ment is often redeWning goals and objectives
(Abernethy & Brownell, 1999). In those circum-
stances, additional pressure is imposed on the
organization’s information processing capacity
and more interaction between top management
and sub-ordinates is required to increase the Xow
of information (Galbraith, 1973).
The interactional needs and the information
processing capacity necessary for the capabilities
are likely to be fostered by an interactive use of
PMS. Indeed, in providing an agenda and a forum
for the regular face-to-face debate and dialogue, an
interactive use allows top management to send sig-
nals that stimulate and concentrate organizational
attention toward top management preferences,
strategic uncertainties and organizational goals
and objectives (Simons, 1995). Considering the
characteristics of integrativeness within PMS, top
management can provide an understanding of
cause–eVect relationships between operations,
strategy and goal, as well as between various
aspects of the value chain (Chenhall, 2005). Also,
with a focus on dialogue and communication
between organizational actors of diVerent or iden-
tical hierarchical levels, the interactive use of PMS
acts as an integrative liaison device that breaks
down the functional and hierarchical barriers that
restrict the Xow of information (Abernethy &
Brownell, 1999; Abernethy & Lillis, 1995). Lastly,
by focusing regular attention on strategic uncer-
tainties, interactive use of PMS provide a lever to
Wne-tune analyses and actions, and alter strategy as
competitive markets change (Bisbe & Otley, 2004).
In terms of information processing activities,
Kohli and Jaworski (1990) identify three basic
components, namely intelligence generation, intel-
ligence dissemination, and responsiveness. Simi-
larly, Huber (1991) speciWes four processes:
knowledge acquisition, knowledge distribution,
information interpretation and organizational
memory.3 Therefore, internal mechanisms must be
in place: (i) to ensure knowledge generation
throughout the organization, (ii) to communicate,
disseminate and sell this knowledge throughout
the organization, and (iii) to plan actions and coor-
dinate their implementation (Kohli & Jaworski,
1990). An interactive use of PMS has the power to
focus organizational attention on the speciWc stra-
tegic uncertainties for which knowledge must be
generated and cause–eVect relationships under-
stood. PMS is an important formal mechanism
used to collect information to develop capabilities
3
Intelligence generation, knowledge acquisition, and infor-
mation interpretation refer to the collection and assessment of
information. Intelligence dissemination and knowledge distri-
bution refer to the process by which information is shared
throughout the organization. Responsiveness is the action tak-
en in response to the knowledge gained and shared, while orga-
nizational memory refers to the means by which knowledge
becomes institutionally available and stored for future use
(Huber, 1991; Kohli & Jaworski, 1990).
 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
(Chenhall, 2005). Moreover, by fostering organiza-
tional dialogue and debate, and encouraging infor-
mation exchange, interactive use contributes to
knowledge dissemination, information distribution
and communication, and the emergence of strate-
gic actions (Haas & Kleingeld, 1999; Malina &
Selto, 2001; Simons, 1995). Hence, an interactive
use of PMS contributes to expanding the organiza-
tion’s information processing capacity and foster-
ing interaction among organizational actors.
Consequently, an interactive use fosters the
deployment of the four capabilities. Formally
stated:
Hypothesis 2. An interactive use of PMS tends to
positively inXuence capabilities of market orienta-
tion, entrepreneurship, innovativeness and organi-
zational learning.
Relationships between joint use of PMS and
capabilities
As illustrated by the previous two hypotheses,
interactive use of PMS stimulates opportunity-
seeking and fosters dialogue, while diagnostic use
creates constraints and ensures compliance with
orders. Together, diagnostic and interactive uses
create a dynamic tension which has two eVects: (i)
ensuring that positive eVects of interactive use on
capabilities will be achieved; and (ii) expanding
these positive eVects of interactive use.
First, a diagnostic use of PMS ensures that the
positive eVects of interactive use on capabilities
will be achieved. In some circumstances, the poten-
tial beneWts of interactive use may vanish due to
insuYcient diagnostic use to set boundaries and to
highlight eVectiveness issues. This can produce a
loss of direction, wasted energy and a disruption of
continuity (Cameron, 1986; Chenhall & Morris,
1995). Similarly, the potential beneWts of interac-
tive use can be lost due to excessive diagnostic use
which constrains innovation and risk taking. This
can produce stagnation, loss of energy and declin-
ing morale (Cameron, 1986; Chenhall & Morris,
1995).
More importantly, a diagnostic use of PMS
helps to increase the positive eVects of an interac-
tive use on capabilities. Indeed, beyond underlying
assumptions that conXict and tension are negative
537
and destructive, growing evidence from the conXict
literature suggests that they may be beneWcial to
individual and organizational performance, and
that avoiding and suppressing conXict reduces cre-
ativity, decision quality, product development, and
communication (DeDreu, 1991; Nicotera, 1995).
ConXict and tension foster organizational dia-
logue, stimulate creativity, and focus organiza-
tional attention (Amason, 1996; Tjosvold, 1991;
DeDreu, 1991; English, 2001; VanSlyke, 1999).
These three elements, which have been presented
as positive eVects of interactive use on capabilities
(see Hypothesis 2), are ampliWed by the combina-
tion of diagnostic and interactive use. They are dis-
cussed more speciWcally below.
Dynamic tension between diagnostic and inter-
active use of PMS stimulates organizational dia-
logue (Dent, 1987). It provides the opportunity for
dialectically styled interactions by providing a
means to debate vigorously opposing positions
(Chenhall, 2004). More speciWcally, dynamic ten-
sion provides valuable information that increases
Xexibility, innovation, and improvement. It stimu-
lates continual communication concerning strategic
issues and promotes mutual understanding. Ten-
sion also encourages open and lively discussions,
and helps employees group their ideas and actions
(Amason, 1996; DeDreu, 1991; Tjosvold, 1991).
Moreover, creativity is enhanced by dynamic
tension, which leads organizational members to
integrate seemingly opposed elements (VanSlyke,
1999). Tension triggers the identiWcation of alter-
native ways of doing things by supporting the
identiWcation and synthesis of a variety of view-
points (Chenhall, 2004). Finally, dynamic tension
resulting from the balanced use of PMS in a diag-
nostic and interactive fashion contributes to focus-
ing organizational attention. Indeed, tension
makes underlying issues explicit and helps groups
to deWne their boundaries. Thus, it provides the
motivation and strength to deal with tough prob-
lems. Tension also fosters involvement and
empowerment by providing incentives for diVerent
groups to pull together toward a common goal
(Amason, 1996; DeDreu, 1991; Tjosvold, 1991).
To summarize, the joint eVect of a balanced use
of PMS diagnostically and interactively constitutes
countervailing forces that create dynamic tension.
538 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
This tension ensures the achievement of the posi-
tive eVects of interactive use on capabilities.
Dynamic tension also increases these positive
eVects by fostering organizational dialogue, stimu-
lating creativity, and focusing organizational
attention. Formally stated:
Hypothesis 3. The dynamic tension resulting from
a balanced use of PMS in a diagnostic and interac-
tive fashion tends to positively inXuence the capa-
bilities of market orientation, entrepreneurship,
innovativeness and organizational learning.
Relationships between PMS, capabilities and
organizational performance
Following the resource-based view of the Wrm,
unique resources and capabilities lead to a sus-
tained competitive advantage, which in turn con-
tributes to performance diVerences among Wrms.
Market orientation, organizational learning, inno-
vativeness, and entrepreneurship constitute four
capabilities that are valuable, hard to duplicate,
and non-substitutable. They are considered to be
key drivers of organizational transformation and
strategic renewal by manipulating resources into
new value-creating strategies (e.g., Bhuian et al.,
2005; Danneels, 2002; Eisenhardt & Martin, 2000;
Hitt et al., 2001; Ireland et al., 2001). Empirically,
previous studies provide evidence showing that
these four capabilities contribute positively to per-
formance (e.g., Hult & Ketchen, 2001; Lee, Lee, &
Pennings, 2001; Naman & Slevin, 1993; Narver &
Slater, 1990; Spanos & Lioukas, 2001).
Diagnostic and interactive use of PMS, as well as
the dynamic tension resulting from their balanced
use, have been linked to capabilities of market ori-
entation, organizational learning, innovativeness,
and entrepreneurship (Hypotheses 1–3). These
capabilities are expected to lead to organizational
performance. Thus, the use of PMS can be expected
to have indirect implications for performance by
inXuencing the deployment of capabilities which
are considered to be valuable, hard to duplicate,
and non-substitutable. Hence, diagnostic and inter-
active use of PMS and the dynamic tension result-
ing from their balanced use inXuence the four
capabilities, which in turn increase performance.
Therefore, the following hypotheses are proposed:
Hypothesis 4a. The diagnostic and interactive use
of PMS have an indirect eVect on organizational
performance through their contribution to capa-
bilities of market orientation, entrepreneurship,
innovativeness and organizational learning.
Hypothesis 4b. The dynamic tension resulting from
a balanced use of PMS in a diagnostic and interac-
tive fashion has an indirect eVect on organizational
performance through its contribution to capabili-
ties of market orientation, entrepreneurship, inno-
vativeness and organizational learning.
No speciWc hypotheses supporting a direct rela-
tionship between PMS use and performance have
been formulated. Despite the fact that prior
research has examined the relationship between
MCS and performance using a notion of Wt to the
context of the organization (e.g., Govindarajan,
1988; Govindarajan & Fisher, 1990; Perera, Harri-
son, & Poole, 1997; Sim & Killough, 1998), and
despite the fact that another line of research has
supported a positive relationship between the
design of PMS (increased reliance on non-Wnancial
information) and performance (e.g. Baines & Lang-
Weld-Smith, 2003; Davila, 2000; Said, Elnaby, &
Wier, 2003; Scott & Tiesen, 1999), the exact nature
of the relationship between the use of PMS and per-
formance remains ambiguous. Theoretical support
and prior empirical evidence in the literature are
insuYcient to justify a direct relationship between
PMS use and performance at an organizational
level (Bisbe & Otley, 2004). Also, recent studies
using the Simons’ framework did not Wnd empirical
evidence supporting a direct relationship between
the interactive use of MCS and performance (Aber-
nethy & Brownell, 1999; Bisbe & Otley, 2004).
Furthermore, according to the resource-based
view, information and control systems are gener-
ally not a source of competitive advantage for two
reasons: (i) they lead Wrms to fully realize the ben-
eWts of the resources they control but do not gen-
erate sustainable rents, and (ii) they can be readily
transferred (Barney et al., 2001). Hence, following
this line of reasoning, PMS use may not contrib-
ute directly to performance, but instead contribute
indirectly through capabilities. On the other hand,
the accounting literature has demonstrated the
ways in which the use of MCS aVects their role
 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
and functioning as well their impact within the
organizations (e.g., Abernethy & Brownell, 1999;
Ahrens & Chapman, 2004; Bisbe & Otley, 2004;
Chapman, 1998; Chenhall & Morris, 1995;
Simons, 1995). From a theoretical standpoint and
following resource-based logic, it could be argued
that the use of PMS in a joint diagnostic and inter-
active fashion has a positive impact on perfor-
mance. Indeed, the balance between diagnostic
and interactive use may be considered as a capa-
bility. In this regard, the ability to reach a balance
between two opposing uses of PMS which, simul-
taneously, try to stimulate innovation while
searching for predictable achievements represents
a capability that is valuable, distinctive, and
imperfectly imitable. The ability to manage the
combination of diagnostic and interactive use
depending on various internal and external factors
is complex and may not be readily transferred.
These opposing views from the RBV and MCS lit-
erature combined with the absence of substantive
empirical evidence preclude the formulation of
any hypotheses. Nevertheless, in order to contrib-
ute to this debate and to expand current literature,
the links between diagnostic and interactive use of
PMS and dynamic tension versus performance
will be tested. Since a large proportion of the rela-
tionships between PMS use and performance is
expected to come indirectly through the four
capabilities (Hypothesis 4), the direct eVects (if
any) are expected to be relatively small.
Validation of the model
Various internal and external contextual factors
interact together to cause uncertainty. As the level
of uncertainty varies, diVerent forms of communi-
cation are necessary to mobilize and integrate
information (Chapman, 1997). Environmental
context, organizational size and organizational
culture4 are important contextual factors which
inXuence the role of PMS (e.g. Bhimani, 2003;
Chenhall, 2003; Henri, in press; Hoque & James,
2000). These variables also suggest conXicting
implications and potential tension (Dent, 1987;
4
Organizational culture is deWned here as the shared values
that interact with an organization’s structures and control sys-
tems to produce behavioural norms Uttal and Fierman (1983).
539
Quinn & Cameron, 1983).5 While size favors
bureaucratic formalization, the complex and
changing environmental context calls for Xuidity
and Xexibility in the management practice (Dent,
1987). On the other hand, following the competing-
values model, there are likely to be simultaneous
pressures for control values fostering order and
formality and Xexibility values reXecting adapt-
ability and responsiveness (Quinn & Cameron,
1983; Quinn & Kimberly, 1984). As the diagnostic
and interactive use of PMS fulWll diVerent roles,
their use and the dynamic tension emerging from
their balanced use might vary depending on the
level of uncertainty. In order to validate the
robustness of the theoretical model, sub-group
analyses are used to assess cross-sample validation
and to reinforce the hypothesis tests. Splitting the
sample at the median for each contextual variable,
two sub-samples will be created and compared.
Methododology
Research design
Data were collected through a structured ques-
tionnaire sent to one member of top management
teams (CEO, COO, CFO, or senior vice-presidents).
The survey implementation followed four steps: pre-
notiWcation, initial mailing, Wrst follow up, and sec-
ond follow up. To generate early interest, the Wrst
step was to notify respondents in the form of a let-
ter, phone call or e-mail. A mail-out package includ-
ing a cover letter, the questionnaire and a business
reply envelope was then sent to every contact name.
In a few cases, the questionnaire was sent by fax or
e-mail. The Wrst follow up consisted of a postcard
reminder which was sent to every respondent, while
the second was a phone call or replacement ques-
tionnaire sent only to those who had not answered.
The target population consisted of 2175 Cana-
dian manufacturing Wrms listed in Scott’s 2002
database with primary and secondary SIC codes in
5
Dent (1987) also proposed task unpredictability as an
important contextual factor in a context of tension on the de-
sign of MCS. Since the current study examines phenomena at
an organizational level and task unpredictability is an individ-
ual-level construct, the latter is not included in the analyses.
540 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
the range of 21–39. These Wrms were either inde-
pendent companies or SBUs. However, the lack of
a contact name for the top management teams in
several cases reduced the number of usable Wrms in
the target population to 1692. The Wrms were large
enough to ensure that organizational and strategy
variables applied (Miller, 1987), and to ensure that
a formal PMS was in place (Bouwens & Abern-
ethy, 2000). Thus, the Wrms selected in the sample
respected the following two criteria: (i) sales were
at least $20 million Canadian; and, (ii) each had at
least 150 employees.
Current literature reports that a sample size vary-
ing between 100 and 200 cases, or between 5 and 10
subjects per estimated parameter, is adequate for
small-to-medium size structural equation models
(Anderson & Gerbing, 1988; Bentler & Chou, 1987).
In the present case, a total of 383 Wrms participated
to the study giving a response rate of 24%, which is
similar to the 15–25% range reported in similar
recent studies (e.g., Baines & LangWeld-Smith, 2003;
Lee et al., 2001; Spanos & Lioukas, 2001).6 More-
over, a ratio of 6.17 subjects per parameter was
obtained, which is adequate to test the proposed
model. Appendix 1 presents the statistics of the
respondents in terms of position, experience, size
(number of employees) and industry classiWcation.
To test whether the respondents diVered from
the non-respondents, a two-step analysis was con-
ducted. Respondents were Wrst compared with
non-respondents in terms of sample characteristics
(size, location, industry). Next, early and late
respondents were compared to detect any diVer-
ence in the mean score of each variable.7 Using
6
The response rate was calculated as the percentage of usable
returned questionnaires in relation to the number of question-
naires sent, after adjusting for the Wrms which had closed, ended
manufacturing activities or moved, or for which the contact
person had left the organization. As discussed in Appendix 3, to
assess interrater reliability for survey items, duplicate surveys
were sent to a second member of the top management team in
the Wrms that originally returned the questionnaire. Twenty-one
questionnaires were returned. For those 21 Wrms having two
diVerent respondents, a mean score has been computed.
7
Early respondents correspond to the managers that have
Wlled out the questionnaire before the Wrst follow-up. Late
respondents correspond to the managers that have Wlled out the
questionnaire after the second follow-up.
chisquare statistics, no signiWcant diVerences
(p > 0.01) were found between the size, location
and industry of respondent Wrms and non-respon-
dent Wrms. A comparison of the means of the vari-
ables found little diVerence between early and late
respondents. The t-value for only one variable is
signiWcant (organizational learning, t D 2.27,
p < 0.05), but this is not believed to be a serious
problem considering its isolated eVect. While there
is unlikely to be a systemic bias due to diVerences
between respondents and non-respondents, the
generalization of results related to organizational
learning should be made with caution.
Measurement of constructs
All measures are drawn from existing instru-
ments. Descriptive statistics of the constructs and
correlation matrix are presented in Table 1.
Appendix 2 shows the questionnaire items, Cron-
bach Alpha for each construct, and statistics from
a conWrmatory factor analysis (Wrst- and second-
order loadings, and goodness-of-Wt indices8).
Interactive and diagnostic uses of PMS are mea-
sured using an adapted version of the Van-
denbosch’s (1999) instrument. Developed originally
to measure the use of executive support systems
(EES), this instrument is based on several dimen-
sions, notably score keeping (diagnostic) and atten-
tion-focusing (interactive). The choice of this
instrument is justiWed by its development based on
theories of accounting control, including Simons
(1990), before its adaptation to a management-
information context. Furthermore, EES is used as a
surrogate for accounting and management infor-
mation and is restricted to the accounting, manage-
ment and control information provided. Thus,
PMS and EES have common base that allow the
adaptation of the instrument to our speciWc con-
8
The indices used to assess the model are among the most
frequently reported, namely NNFI (non-normed Wt index), CFI
(comparative Wt index), and RMSEA (root mean square error
of approximation). The threshold values recommended are (i)
NNFI > 0.90 Tabachnick & Fidell (2001), (ii) CFI > 0.95 Hu &
Bentler (1995), and (iii) RMSEA < 0.l0 (Browne & Cudeck
(1993).
 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558 541

Table 1
Descriptive statistics and correlation matrix
Market Entrepre- Innova- Organizational Diagnostic Interactive Dynamic Performance
orientation neurship tiveness learning use1 use1 tension
Descriptive statistics
No. of items used 13 9 5 4 4 7 – 3
Theoretical range 1–7 1–7 1–7 1–7 1–7 1–7 – 1–7
Minimum 2.80 1.80 1.80 1.00 ¡4.60 ¡4.00 ¡3.20 1.00
Maximum 6.90 6.70 7.00 7.00 1.50 2.00 18.40 7.00
Mean 5.02 4.20 5.42 5.45 0 0 0.63 4.57
Standard deviation 0.76 0.86 0.89 0.99 0.99 1.02 1.69 1.33
Median 5.10 4.20 5.60 5.50 0.10 0.10 0.20 4.70
Correlation matrix (Pearson)
Market orientation 1.0
Entrepreneurship 0.461¤¤ 1.0
Innovativeness 0.515¤¤ 0.617¤¤ 1.0
Organizational 0.598¤¤ 0.430¤¤ 0.516¤¤ 1.0
learning
Diagnostic use 0.384¤¤ 0.080 0.174¤¤ 0.264¤¤ 1.0
Interactive use 0.414¤¤ 0.188¤¤ 0.236¤¤ 0.381¤¤ 0.642¤¤ 1.0
Dynamic tension ¡0.151¤¤ ¡0.021 ¡0.024 ¡0.059 ¡0.452¤¤ ¡0.301¤¤ 1.0
Performance 0.303¤¤ 0.123* 0.136¤¤ 0.167¤¤ 0.236¤¤ 0.192¤¤ ¡0.012 1.0
Notes: The scores of diagnostic and interactive uses have been centered. Before centering, the mean scores (standard deviations) for
diagnostic and interactive were, respectively, 5.63 (0.98) and 5.07 (1.05).
¤
SigniWcant at the 0.05 level; ¤¤ SigniWcant at the 0.01 level.

text. Two items were added to the interactive
dimension to better reXect its use in a context of
MCS. All Wrst- and second-order loadings are sig-
niWcant (p < 0.01), the Cronbach Alpha coeYcients
exceeded common cut-oV level of 0.70 (Nunnally,
1967), and the goodness-of-Wt indices respected the
recommended threshold values.
Dynamic tension is operationalized as a product
term between diagnostic and interactive use. A
product term can be treated as a variable without
any theoretical meaning (to test an interaction) or as
a construct based on a theoretical justiWcation (Cor-
tina, Chen, & Dunlap, 2001). In this study, the prod-
uct term is treated as a construct having its own
theoretical meaning. Several procedures are avail-
able to create and test multiplicative terms within
structural equation models. The seminal work of
Kenny and Judd (1984) provides the foundation for
these procedures. Among various approaches, Jac-
card and Wan (1995) propose a procedure having
the same logic as Kenny and Judd but simpler to
implement and adapted for the latest versions of
LISREL. Essentially, all possible cross products of
the existing indicators are used as indicators of the
latent product.9 Although this procedure is one of
the most technically robust, it is also one of the most
complicated ones (Cortina et al., 2001).10
Four diVerent validated scales are used to mea-
sure internal capabilities. The well-established
MKTOR instrument developed by Narver and
Slater (1990) is used to measure market orientation.
The instruments proposed by Naman and Slevin
(1993) and Hult (1998) are respectively used to
measure entrepreneurship and organizational
learning. Finally, following Hurley and Hult (1998),
the instrument developed by Burke (1989) is used
9
Organizational tension has four latent indicators as the
cross-products of the two indicators of diagnostic use (du1 and
du2) and the two indicators of interactive use (iu1 and iu2). Spe-
ciWcally, the four indicators are: (i) du1 ¤ iu1, (ii) du1 ¤ iu2, (iii)
du2 ¤ iu1, and (iv) du2 ¤ iu2. Moreover, with this approach, sev-
eral parameters are constrained to equal values determined by
various equations, namely the variance of the latent product,
the paths from the latent product to its indicators, and the error
variances of these indicators.
10
To validate our results and provide a sensibility analysis, the
single-indicator approach suggested by Ping (1995) has also
been used. It has provided similar results and conclusions.
542 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
to measure innovativeness. All Cronbach Alpha
coeYcients exceeded the common cut-oV level of
0.70, all Wrst- and second-order loadings are signiW-
cant (p < 0.01), and the goodness-of-Wt indices
respect the recommended threshold values.
Organizational performance is measured with a
subjective instrument using three indicators: (i)
sales volume; (ii) return on investment; and, (iii)
proWts. As several authors argue (e.g., Dess & Rob-
inson, 1984; Venkatraman & Ramanujam, 1987),
in terms of consistently providing valid and reli-
able performance assessment, neither objective nor
subjective measures are superior. The three path
loadings are signiWcant (p < 0.01), the Cronbach
Alpha coeYcient is 0.81, and the goodness-of-Wt
indices respect the recommended threshold values.
Lastly, the validation variables used to test
robustness of the model are measured as follows.
Organizational culture follows a competing-values
model (Quinn & Rohrbaugh, 1983) and is mea-
sured using the instrument designed by (Krakower
& Niwa, 1985).11 Govindarajan’s (1984) instru-
ment is used to assess environmental uncertainty,
while size is measured using the natural log of the
number of employees.
Validation of constructs
Besides the conWrmatory factor analysis (CFA)
discussed above to establish convergent validity,
several other procedures and tests were conducted
to establish the reliability and validity of con-
structs: pre-test of the questionnaire in three steps,
tests of convergence and discriminant validity, and
assessment of interrater reliability. Appendix 3
describes these elements and presents the main
results. Overall, based on the CFA and other tests,
all constructs reXect strong validity and reliability.
11
Respondents were asked to distribute 100 points among the
four ideal cultural types (rational, hierarchical, developmental,
and group) along four dimensions. A score was compiled for
each cultural type by averaging the ratings obtained on the four
dimensions. An overall measure of culture was developed by
subtracting the mean score of the developmental and group cul-
ture (focus on Xexibility) from the mean score of the rational
and hierarchical culture (focus on control). By representing the
“net value” of the control/Xexibility dimension, the results reX-
ect the importance of control values for each organization.
Structural equation model
The theoretical model discussed in this study
reXects two features that must be considered when
choosing a statistical tool: (i) presence of multiple
and interrelated dependence relationships, and (ii)
presence of latent variables that cannot be
observed directly. Structural equation modeling
(SEM) represents a set of multivariate techniques
that allow the simultaneous study of several causal
relationships between endogenous and exogenous
variables (Mueller, 1996). Data collected from the
survey were analyzed with LISREL 8.52. Consider-
ing multivariate non-normality of the data and the
presence of a product term, maximum likelihood
estimates were used (Bentler & Chou, 1987; Cor-
tina et al., 2001). Furthermore, composite indices
and a partial disaggregation approach were used
to represent latent construct (Bagozzi & Heather-
ton, 1994).12 As Landis, Beal, & Tesluk (2000) sug-
gest, three indicators were used per latent construct
except for PMS use. Indeed, to minimize conver-
gence problems associated with the use of multipli-
cative terms in SEM, and to reduce the number of
parameters associated with the product term, two
indicators were used for PMS diagnostic and inter-
active use.
Considering the presence of a product term
(dynamic tension) in the model, it is usually recom-
mended that variables involved in the creation of
the product term be centered prior to their forma-
tion (Cortina et al., 2001; Hartmann & Moers,
1999). Two main reasons justify the use of devia-
tion scores. First, they minimize identiWcation
12
Composite indices represent aggregates of items which are
used as manifest indicators of a latent construct. As suggested
by Hall, Snell, and Foust (1999), items parcelling presents sev-
eral advantages. First, it tends to provide results that are more
reliable and normally distributed, and to have values that are
more continuously distributed. Furthermore, by reducing
sources of contamination, composite indices contribute to the
overall Wt of the model. Finally, these indices are useful to re-
duce the number of parameters in the model and thus contrib-
ute to model identiWcation. Using a partial disaggregation
approach, each dimension is represented as a separate latent
variable indicated by composites of sub-scales. Several compos-
ites are formed for each dimension in which each composite is a
mean of items (Bagozzi & Heatherton, 1994).
 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
problems caused by the correlation between the
variables and the products created from them. Sec-
ond, they allow the interpretation of the coeY-
cients obtained for the lower-order eVects (main
eVects).13 Hence, PMS diagnostic and interactive
use were centered prior to the formation of the
product term.
Results
Structural equation models
Table 2 presents the results of two structural
equation models. Model A tests the speciWc rela-
tionships between diagnostic and interactive uses
of PMS, capabilities and performance (main
eVects). This model is used to speciWcally test
Hypothesis 1, 2 and 4a. Model B introduces the
dynamic tension resulting from a balanced use of
PMS in a diagnostic and interactive fashion (inter-
action term). This model is used to test Hypotheses
3 and 4b speciWcally, and to provide a complemen-
tary testing of Hypotheses 1, 2 and 4a. For both
models, goodness-of-Wt indices respect the recom-
mended threshold mentioned previously (see Foot-
note 7) and thus, reXect a good Wt of the data to the
model. Table 3 presents the results of six sub-group
analyses performed to validate the robustness of
the theoretical model using environmental uncer-
tainty, size and organizational culture as splitting
variables. Every model respects the recommended
threshold mentioned previously.
Hypothesis tests
Diagnostic and interactive use, and capabilities
As reXected by models A and B of Table 2, diag-
nostic use of PMS is signiWcantly and negatively
related to capabilities of market orientation, entre-
preneurship, innovativeness and organizational
learning (p < 0.05). The same negative and signiW-
cant relationships are also suggested by the six sub-
13
Linear transformations do not change the coeYcient of the
product term, nor its t-statistic and level of signiWcance
(Hartmann & Moers, 1999).
543
group analyses (Table 3), providing strong support
for Hypothesis 1.
Furthermore, in both model A and B, there are
statistically signiWcant positive relationships
between interactive use of PMS and capabilities of
market orientation, entrepreneurship, innovative-
ness and organizational learning (p < 0.05). The
same positive and signiWcant relationships are also
reXected by Wve out of six sub-group analyses (posi-
tive but non-signiWcant relationships being associ-
ated to a context of low environmental uncertainty).
Hence, Hypothesis 2 also receives strong support.
Dynamic tension and capabilities
Based on model B, Hypothesis 3 does not receive
much support. Indeed, despite positive coeYcients,
a statistically signiWcant relationship between
dynamic tension and the four capabilities does not
exist. However, the results of the sub-group analy-
ses suggest that for Wrms facing high environmental
uncertainty, dynamic tension has a positive and sig-
niWcant eVect on organizational learning (0.129,
p < 0.05) and entrepreneurship (0.09, p < 0.10). How-
ever, in a context of low uncertainty, dynamic ten-
sion has a negative eVect on organizational learning
(¡0.290, p < 0.05). Also, Wrms favoring Xexibility
values and those favoring control values reXect
opposite results. In fact, the four capabilities and
dynamic tension exhibit positive and signiWcant
relationships for the Xexible Wrms. Conversely, sig-
niWcant and negative relationships are found
between capabilities and dynamic tension when
Wrms reXect control values. Globally, no signiWcant
relationship is observed for small or large Wrms.
Hence, Hypothesis 3 receives support only for Wrms
having Xexibility values, and partial support for
Wrms facing high environmental uncertainty.
Hypothesis 3 is reversed for Wrms having control
values and to some extent, when Wrms face low
environmental uncertainty.
Relationships with organizational performance
Despite statistically signiWcant links between
diagnostic and interactive use of PMS and capabil-
ities of market orientation, entrepreneurship, inno-
vativeness and organizational learning, hypothesis
4a does not receive empirical support. Indeed, the
results provided by model A and B show positive
544 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558

Table 2
Results of the structural equation models
Description of path and expected sign Model A Model B
Path coeYcient Z-statistics Path coeYcient Z-statistics
PMS diagnostic use ! Market orientation (¡) ¡3.838 ¡1.984¤¤ ¡5.011 ¡2.118¤¤
PMS diagnostic use ! Entrepreneurship (¡) ¡5.957 ¡2.037¤¤ ¡8.606 ¡2.179¤¤
PMS diagnostic use ! Innovativeness (¡) ¡5.817 ¡2.034¤¤ ¡7.525 ¡2.176¤¤
PMS diagnostic use ! Organizational learning (¡) ¡5.717 ¡2.003¤¤ ¡7.367 ¡2.136¤¤
PMS interactive use ! Market orientation (+) 4.199 2.164¤¤ 4.526 2.331¤¤
PMS interactive use ! Entrepreneurship (+) 6.109 2.084¤¤ 7.304 2.256¤¤
PMS interactive use ! Innovativeness (+) 6.023 2.101¤¤ 6.451 2.275¤¤
PMS interactive use ! Organizational learning (+) 6.141 2.147¤¤ 6.565 2.321¤¤
Dynamic tension ! Market orientation (+) n/a n/a 0.009 0.328
Dynamic tension ! Entrepreneurship (+) n/a n/a 0.030 0.731
Dynamic tension ! Innovativeness (+) n/a n/a 0.030 0.909
Dynamic tension ! Organizational learning (+) n/a n/a 0.063 1.547
Market orientation ! Performance (+) 1.570 1.536 1.767 1.731¤
Entrepreneurship ! Performance (+) 1.619 1.076 1.698 1.264
Innovativeness ! Performance (+) 3.783 1.016 4.218 1.159
Organizational learning ! Performance (+) 0.718 1.048 0.828 1.225
PMS diagnostic use ! Performance (¡) 3.832 0.760 6.102 0.893
PMS interactive use ! Performance (+) ¡3.655 ¡0.726 ¡4.806 ¡0.855
Dynamic tension ! Performance (+) n/a n/a 0.081 2.438¤¤¤
Fit indices of the model
Chi-square 284.012 571.250
DF 137 214
NNFI 0.972 0.948
CFI 0.978 0.956
RMSEA 0.0530 0.0661
Note: ¤ SigniWcant at the 0.10 level; ¤¤ SigniWcant at the 0.05 level; ¤¤¤ SigniWcant at the 0.01 level.

but not signiWcant paths between the four capabili-
ties and performance. Hence, the indirect relation-
ship between diagnostic and interactive use of
PMS and performance is not supported. Hypothe-
sis 4b suggests an indirect eVect of dynamic tension
on performance through the four capabilities. The
absence of statistically signiWcant relationships
between the four capabilities and performance also
precludes the support of this hypothesis. The same
conclusion is also reXected in the sub-group analy-
ses where no signiWcant relationships are estab-
lished between the four capabilities and
performance.
In sum, Hypotheses 1 and 2 concerning the
direct relationship between diagnostic and
interactive use of PMS and capabilities of market
orientation, entrepreneurship, innovativeness and
organizational learning receive strong support.
The positive relationship suggested by Hypothesis
3 among dynamic tension resulting from the bal-
anced use of PMS in a diagnostic and interactive
fashion and the four capabilities receive partial
support in two sub-group analyses (high environ-
mental uncertainty and Xexibility values). The sign
of these relationships has been reversed in two sub-
group analyses (low environmental uncertainty
and control values). Lastly, the indirect relation-
ships between PMS use and performance proposed
by Hypothesis 4 is not supported.
Discussion
First, the results of this study strongly suggest
that an interactive use of PMS fosters capabilities
of market orientation, entrepreneurship, innova-
tiveness, and organizational learning. Indeed, by
focusing organizational attention on strategic pri-
orities and stimulating dialogue, PMS contribute
Table 3
Results of the sub-group analyses
Description of path and expected sign Path coeYcients
Environmental uncertainty Size Organizational culture
(i) Low (ii) High (iii) Small (iv) Large (v) Control (vi) Flexibility
¤¤¤ ¤¤¤ ¤ ¤¤
PMS diagnostic use ! Market orientation (¡) ¡6.902 ¡2.752 ¡2.295 ¡4.059 ¡2.794 ¡4.291¤
PMS diagnostic use ! Entrepreneurship (¡) ¡14.991 ¡3.952¤¤¤ ¡4.758¤¤¤ ¡6.859¤ ¡5.369¤¤ ¡6.451¤
PMS diagnostic use ! Innovativeness (¡) ¡13.618 ¡3.665¤¤¤ ¡3.728¤¤¤ ¡6.436¤¤ ¡4.40¤¤ ¡6.518¤
PMS diagnostic use ! Organizational learning (¡) ¡10.763 ¡4.123¤¤¤ ¡3.700¤¤¤ ¡6.181¤ ¡4.547¤¤ ¡6.079¤
PMS interactive use ! Market orientation (+) 4.161 3.170¤¤¤ 2.473¤¤¤ 3.10¤¤ 1.863¤¤ 4.108¤
PMS interactive use ! Entrepreneurship (+) 8.343 4.304¤¤¤ 4.511¤¤¤ 4.590¤¤ 3.208¤¤ 5.910¤
PMS interactive use ! Innovativeness (+) 7.566 4.183¤¤¤ 3.589¤¤¤ 4.467¤¤ 2.664¤¤ 5.986¤
PMS interactive use ! Organizational learning (+) 6.384 4.755¤¤¤ 3.826¤¤¤ 4.577¤¤ 2.910¤¤ 5.823¤
Dynamic tension ! Market orientation (+) ¡0.132 0.028 0.018 ¡0.138 ¡0.283¤¤¤ 0.077¤¤
Dynamic tension ! Entrepreneurship (+) ¡0.151 0.092¤ 0.011 0.176 ¡0.253¤¤ 0.085¤
Dynamic tension ! Innovativeness (+) ¡0.063 0.072 0.013 0.005 ¡0.201¤¤ 0.073¤
Dynamic tension ! Organizational learning (+) ¡0.290¤¤ 0.129¤¤ 0.051 0.045 ¡0.381¤¤¤ 0.157¤¤¤
Market orientation ! Performance (+) 0.273 1.482 0.744 ¡0.721 1.1168 2.441
Entrepreneurship ! Performance (+) ¡0.029 0.472 0.267 1.256 1.199 4.032
Innovativeness ! Performance (+) ¡1.820 0.206 0.626 2.270 2.059 8.787
Organizational learning ! Performance (+) 0.111 ¡0.102 0.150 0.878 0.566 0.833
PMS diagnostic use ! Performance (¡) ¡6.618 0.190 ¡0.477 5.785 1.753 5.470
PMS interactive use ! Performance (+) 3.916 0.299 0.948 4.081 ¡0.790 ¡4.349
Dynamic tension ! Performance (+) 0.010 0.182¤¤¤ 0.133¤ ¡0.025 ¡0.003 0.129¤¤
Fit indices of the model
Chi-square 449.846 467.961 522.492 343.160 373.931 478.892
DF 214 214 214 214 214 214
J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558

NNFI 0.926 0.937 0.938 0.944 0.938 0.937

CFI 0.938 0.947 0.947 0.952 0.947 0.946
RMSEA 0.068 0.071 0.081 0.056 0.064 0.072
Number of cases 206 177 217 166 154 229
Note: ¤ SigniWcant at the 0.10 level; ¤¤ SigniWcant at the 0.05 level; ¤¤¤ SigniWcant at the 0.01 level.
545
546 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
to the process of knowledge generation and dis-
semination, and foster collaboration throughout
the organization. These Wndings support Simons’
(1990) model that views control systems as more
than mechanistic tools used to support strategy
implementation, but also powerful devices to stim-
ulate and manage the emergence of strategies
throughout the organization. These results are also
complementary to the empirical studies conducted
by Abernethy and Brownell (1999) and Bisbe and
Otley (2004) that also support the role of MCS in
an innovative and changing context. However,
while these two studies suggest a moderate eVect of
interactive use on the relationship between innova-
tion/strategic change and performance, the current
results provide evidence of a direct relationship
between interactive use and capabilities leading to
strategic choices and performance. This diVerence
can be explained in part by the focus of previous
studies on the interactive use of MCS while the
current study integrates also the diagnostic use as
well as the dynamic tension.
Second, the results of this study strongly suggest
that a diagnostic use of PMS exerts negative pres-
sure on capabilities of market orientation, entre-
preneurship, innovativeness, and organizational
learning. By creating constraints to ensure compli-
ance with orders, diagnostic use has a negative
eVect on these four capabilities. This is coherent
with the model of Simons and other critics of
traditional mechanistic use of control systems.
Interestingly, in terms of correlations (Table 1),
capabilities are positively and signiWcantly corre-
lated with the diagnostic use of PMS (except for
entrepreneurship). Although there is no reason
that the sign of a beta coeYcient must be the same
sign as the correlation between two variables (Ben-
tler & Chou, 1987), this diVerence needs to be dis-
cussed. DiVering signs are usually taken as an
indicator of a negative suppression. This happens
when the sign of a regression weight of an indepen-
dent variable is the opposite of what would be
expected on the basis of its correlation with the
dependant variable (Tabachnick & Fidell, 2001).
The suppressor variable enhances the eVects of
other variables by suppressing irrelevant variance
to the prediction of an independent variable. This
would mean that from a univariate perspective, the
correlation coeYcient between diagnostic use and
capabilities is positive, but in a multivariate setting,
the interactive use acts as a negative suppressor for
diagnostic use. This is consistent with previous the-
oretical arguments suggesting complementarity
and competition between the diagnostic and inter-
active use of PMS. This also justiWes the integra-
tion of both types of PMS use in the theoretical
and empirical analyses.
The results suggest that diagnostic and interac-
tive uses of PMS contribute both speciWcally and
collectively to capabilities. In some circumstances,
a balanced use creates dynamic tension which
ensures that positive eVects of interactive use on
capabilities will be achieved, and that such tension
expands these positive eVects of interactive use by
fostering organizational dialogue, stimulating cre-
ativity, and focusing organizational attention. At
Wrst sight, the results did not reXect any signiWcant
relationship between dynamic tension and capabil-
ities. Ex post analyses revealed that the impact of
tension varies in opposite directions depending on
environmental uncertainty and organizational cul-
ture, which explains that, overall, no relationship
was reXected. The following theoretical arguments
are provided to tentatively explain these unex-
pected results.
On the one hand, Wrms facing high environmen-
tal uncertainty and having Xexibility values appear
to beneWt from dynamic tension. In a context of
high environmental uncertainty reXecting constant
change and intense competition, Wrms require inno-
vation and creativity throughout the organization
(Miller, 1988; Miller, Dröge, & Toulouse, 1988).
Crucial organizational capabilities need to be stim-
ulated as much as possible without neglecting orga-
nizational outcomes (Bourgeois & Eisenhardt,
1988; Ghemawat & Costa, 1993). Dynamic tension
becomes one trigger to improve these capabilities.
Furthermore, the four capabilities are supported by
Xexibility values which reXect loose controls, lateral
communication and free Xow of information
(Burns & Stalker, 1961; Quinn & Cameron, 1983;
Quinn, 1988). This context is particularly suitable
for interactive use and positive conXicts which stim-
ulate dialogue and foster creativity.
 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
On the other hand, the results suggest that Wrms
facing low environmental uncertainty and having
control values are negatively aVected by this kind
of tension. In a context where the environment is
more stable, capabilities for diVerentiation become
less critical and so may be the need for creative
conXicts to foster them (Porter, 1985). Also, Wrms
having control values reXect tight control, vertical
communication and restricted Xow of information
(Burns & Stalker, 1961). Hence, dynamic tension
may be less useful because operations are well
known, stability and conformity are valued, and
grass-roots initiatives are not speciWcally encour-
aged by top management (Quinn, 1988; Quinn &
Cameron, 1983). Dynamic tension disturbs organi-
zational routines where procedures, roles, and
internal processes are established and well known.
The structural coeYcients related to dynamic
tension are low, which implies that tension also
has negative eVects. As observed by Marginson
(2002), tension between diagnostic and interac-
tive uses can create possibilities for trade-oVs and
organizational bias. As Lewis (2000) suggests,
tension represents a double-edged sword. It may
serve to trigger change while simultaneously acti-
vating defensive routines that inhibit change.
This means that the positive eVect of dynamic
tension discussed earlier may be reduced because
of the negative dynamics inherent to tension.
Hence, the net value of structural coeYcients is
positive but not necessarily high. More research
is needed to provide a deeper understanding of
the dynamic interplay between the positive and
negative eVects of tension resulting from
balanced use of PMS in a diagnostic and interac-
tive fashion.
The relationships between diagnostic and
interactive use of PMS, as well as dynamic ten-
sion, and performance appear to be indirect.
PMS use inXuences the four capabilities which in
turn, inXuence organizational performance.
However, no clear support has been established
for Hypothesis 4. Indeed, despite a positive and
signiWcant correlation between performance and
each of the four capabilities (Table 1), no signiW-
cant relationships between capabilities and per-
formance has been established in the structural
547
models. This might be because of the restrictive
scope of the performance variable which is lim-
ited to the Wnancial dimension. Capabilities
inXuence other dimensions of performance, such
as market development, customer satisfaction,
development of new products and market share,
which have not been captured in the current
analyses.
No speciWc hypothesis has been proposed for
the direct eVect of PMS use on organizational per-
formance. However, our evidence regarding the
direct eVect of PMS use on Wnancial performance
while not yet reXecting signiWcant results provides
interesting insights (Table 2). In fact, in some cir-
cumstances the impact of diagnostic use on per-
formance is presented as positive while interactive
use appears to negatively inXuence performance.
This would mean that even if diagnostic use works
against the deployment of capabilities, it may con-
tribute to organizational performance by moni-
toring goal achievement, restricting risk taking,
providing boundaries for innovation, and closely
monitoring variations in eVectiveness. Still, the
positive inXuence of interactive use on capabilities
may not be costless. Interactive use necessitates
activities that may be time consuming, such as
various meetings with superiors, sub-ordinates
and peers, as well as continual challenge to and
debate of data and underlying assumptions.
Moreover, important resource requirements may
be necessary to develop new ideas, support trial-
and-error processes, and coordinate grass-roots
initiatives.
Furthermore, results show that dynamic ten-
sion has a direct positive and signiWcant impact
on performance (0.081, p < 0.001). This relation-
ship is observed particularly for Wrms facing high
environmental uncertainty and having Xexibility
values (see Table 3). Assuming that the product
term is a good proxy for dynamic tension, this
suggests that dynamic tension may represent a
capability and a source of competitive advantage.
More speciWcally, the ability to reach a balance
between two opposing uses of PMS that simulta-
neously try to stimulate innovation while search-
ing for predictable achievements may represent a
capability which is valuable, distinctive, and
548 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
imperfectly imitable. This Wnding contradicts cur-
rent literature tied to a resource-based view which
states that control systems are not considered to
be a source of competitive advantage because
they are readily transferred and they lead Wrms to
fully realize only the beneWts of internal resources
(Barney et al., 2001). More research is also needed
concerning the balanced use of PMS as an
organization capability.
Conclusion
The aim of this study was to examine, from a
resource-based perspective, how the use of one
management control system (PMS) can act as an
antecedent to capabilities supporting the material-
ization of strategic choices. Overall, the results
suggest that PMS used in an interactive (diagnos-
tic) fashion contribute positively (negatively) to
the deployment of capabilities of market orienta-
tion, entrepreneurship, innovativeness, and orga-
nizational learning. From their balanced use
emerges dynamic tension which also contributes
positively to capabilities in a context of high envi-
ronmental uncertainty and organizational culture
reXecting Xexibility values. Globally, dynamic ten-
sion contributes to organizational performance
and their management may constitute a form of
capability.
This study contributes to current research at
the boundary between MCS and strategy in three
ways. First, it integrates a very inXuential frame-
work from the Weld of strategy, the resource-based
view, to a management accounting setting. Over
the last decade, RBV has become one of the stan-
dard theories to explain the source of competitive
advantage and the performance diVerences among
Wrms over time. This theoretical framework pro-
vides interesting insights into the dual roles of
MCS in the implementation and formulation of
strategies. Secondly, previous researches examin-
ing the relationship between MCS and strategy
content have provided ambiguous and contradic-
tory results. It has been argued that these ambigu-
ous results were partly attributable to the absence
of a theoretical framework founded on the
resource-based view and the limited attention
devoted to the dynamic tension resulting from
diVerent uses or roles of MCS. This paper has
moved the analysis from the strategic-choice level
to the capabilities level, and provides evidence for
relationships between MCS and capabilities. Also,
the attention devoted to the dynamic tension gen-
erated by the joint eVect of diagnostic and interac-
tive use allows a deeper understanding of the
complexity surrounding the use of MCS to stimu-
late innovation while enabling achievement of
predictable goals. Despite the current perspective
reXected by the resource-based view that control
systems do not represent a source of competitive
advantage, we suggest the opposite view and open
the debate concerning the role of MCS as a capa-
bility which is valuable, distinctive and imper-
fectly imitable.
Third, this study contributes to the emerging
line of research which provides empirical tests for
the model proposed by Simons (1995). The results
support the view of control systems as tools con-
tributing to the implementation of intended strat-
egies, but also as tools stimulating the emergence
of new strategies. This paper expands Simons’
model in several ways. On the one hand, Simons
does not make an explicit distinction between
innovation and organizational learning, referring
to them rather indistinctly in his argumentation.
In this study, innovation and learning are pre-
sented as two speciWc capabilities, and market ori-
entation and entrepreneurship are added as
capabilities also inXuenced by an interactive use of
MCS to foster emergence of new strategies. On the
other hand, as previously mentioned, Simons’
framework leaves relatively unanswered the ques-
tion why organizations combine diagnostic con-
trol interactive control. This paper addresses this
issue by examining the notion of dynamic tension
as the result of the use of PMS in a joint diagnos-
tic and interactive fashion to manage inherent
organizational tension between freedom to inno-
vate and predictable goal achievement. It is
argued that dynamic tension is used to ensure that
positive eVects of interactive use on capabilities
will be achieved and to expand those positive
eVects of interactive use.
 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
This study also has important implications for
management practices. As Epstein (2002) indicates,
there is a need for managers to be aware of drivers
of value in organizations and the causal relation-
ships critical to drive that value. This study reXects
the importance of capabilities as drivers of value
and also the potential of PMS to contribute to
these capabilities. Furthermore, the capabilities to
be developed with PMS are not limited to the
development and implementation of Wnancial and
non-Wnancial indicators. The signiWcant and dis-
tinctive eVect of PMS for the organization comes
from the balance between diagnostic and interac-
tive use by managers.
As with other empirical studies, this one is sub-
ject to potential limitations. First, four capabili-
ties leading to competitive advantage and
strategic renewal are discussed. Nevertheless,
other capabilities would have been plausible (e.g.,
alliancing, manufacturing Xexibility, etc.). Sec-
ond, only one control system was examined
(PMS) while other systems could provide similar
or diVerent conclusions (e.g. budget, project man-
agement, etc.). Third, performance is measured
using a subjective instrument and reXects only the
Wnancial dimension. Even if there is evidence in
favour of consistent results between objective and
subjective measurement, the results should be
interpreted with caution considering the potential
for bias. Fourth, the dynamic-tension variable is a
proxy based on the product term of diagnostic
and interactive use. Moreover, our methodologi-
cal design does not allow the distinction between
the positive and negative eVects of tension on
capabilities and performance. Only a “net value”
is available and used to examine the relationships.
Fifth, using the survey method to collect data cre-
ates the potential for bias due to common
response. Also, no clear-cut evidence of causality
can be established with survey data obtained
from cross-sectional analyses. Rather the evi-
dence must be considered consistent with theoret-
ical arguments and predicted relationships.
Finally, any generalizations taken from this
study’s results to manufacturing organizations or
beyond cannot be made without considerable
caution because of the scope of the current sam-
549
ple (i.e., small-to-medium size manufacturing
Wrms) and the presence of non-response bias for
the organizational-learning variable.
The results of this study provide guidance for
future research. The inXuence of PMS on capabili-
ties should be examined using a non-linear model.
The impact of diagnostic and interactive use may
diVer depending on various levels of capabilities.
Also, the model could be tested with control sys-
tems other than PMS. Furthermore, the results
suggest a positive inXuence of dynamic tension cre-
ated by the use of PMS in a joint diagnostic and
interactive fashion on capabilities and perfor-
mance. Future research could further investigate
the moderator inXuence of environmental uncer-
tainty and organizational culture on these relation-
ships. Moreover, more research is required to
understand how dynamic tension is reinforced and
managed on a day-to-day basis by managers at
diVerent echelons. The framework provided by
Lewis (2000) could provide some guidance to
understand the reinforcing cycles (e.g., splitting,
projection, repression) and the management of ten-
sion (e.g., acceptance, confrontation, transcen-
dence). We need to understand how the actions
required to balance diagnostic and interactive use
vary depending on change in organizational con-
texts (e.g., strategic change, structural change, cul-
tural change) and environmental contexts (e.g.,
new opportunities or threats, intensiWcation of
competition, new regulation). Qualitative method-
ologies would be particularly useful to provide
furher explanations and new insights into these
issues.
Acknowledgements
I would like to thank Claude Laurin and Ann
Langley for their insightful comments and
suggestions. I would also like to acknowledge the
useful contributions of Christopher Chapman,
Robert Chenhall, Louise Côté, Maurice Gosselin,
the anonymous reviewers and the participants at
the 2003 CAAA Conference and 2003 EIASM
Workshop on Performance Measurement and
Management Control.
550 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558

Appendix 1. ProWle of the respondents

Position % Experience within the Wrm (average in years)

CEO/General manager 29 18.4
COO 29 14.6
Senior Vice-presidents 28 13.2
CFO/VP Wnance 11 10.5
Other 3 10.0
Average 14.7

Number of employees %
Fewer than 499 66
Between 500 and 999 18
Between 1000 and 4999 13
Between 5000 and 9999 2
Between 10,000 and 19,999 1
Average 796

Industry classiWcation %
20 Food and kindred products 8.4
21 Tobacco manufactures 0.3
22 Textile mill products 3.1
23 Apparel and other textile products 4.2
24 Lumber and wood products 10.4
25 Furniture and Wxture 4.2
26 Paper and allied products 8.1
27 Printing and publishing 1.8
28 Chemicals and allied products 4.4
29 Petroleum and coal products 1.6
30 Rubber and misc. plastics products 3.9
31 Leather and leather products 1.3
32 Stone, clay, glass, and concrete 3.1
products
33 Primary metal industries 6.0
34 Fabricated metal products 10.4
35 Industrial machinery and equipment 10.4
36 Electrical and electronic equipment 7.3
37 Transportation equipment 7.3
38 Instrument and related products 2.3
39 Misc. manufacturing industries 1.3
 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558 551

Appendix 2. Questionnaire items and statistics of measurement analysis

Performance measurement systems use
Please rate the extent to which your top management team currently uses performance measures to: Scale:
1Dnot at all to 7Dto a great extent
Constructs and items ConWrmatory factor analysis Cronbach
First-order Second-order alpha
loadings loadings
Diagnostic use 0.894¤¤ 0.79
¤¤
Track progress towards goals 1.003
Monitor results 0.803¤¤
Compare outcomes to expectations 0.871¤¤
Review key measures 0.826¤¤
Interactive use 0.829¤¤ 0.87
¤¤
Enable discussion in meetings of superiors, 0.945
sub-ordinates and peersa
Enable continual challenge and debate 0.909¤¤
a
underlying data, assumptions and action plans
Provide a common view of the organization 1.116¤¤
Tie the organization together 1.024¤¤
Enable the organization to focus on common issues 1.010¤¤
Enable the organization to focus on critical success factors 0.782¤¤
Develop a common vocabulary in the organization 1.043¤¤
Goodness-of-Wt of the model:  (43) D 186.472; p < 0.001; NNFI D 0.958; CFI D 0.967; RMSEA D 0.096
2

Note: ¤ SigniWcant at the 0.05 level; ¤¤ SigniWcant at the 0.01 level.

a
These two items have been added to the original instrument.
Internal capabilities
Please indicate the extent to which the following items describe your organization
Constructs and items ConWrmatory factor analysis Cronbach
First-order Second-order alpha
loadings loadings
Market orientation 0.474¤¤ 0.84
¤¤
Communicate information about customer experience 0.605
Understanding of customer needs 0.535¤¤
Measurement of customer satisfaction 0.953¤¤
Commitment and orientation to serving customers’ needs 0.845¤¤
Integration of functions to serve the needs of markets 0.828¤¤
After-sales service 0.766¤¤
Share of information concerning competitors’ strategies 0.587¤¤
Customer satisfaction 0.677¤¤
Managers understand how everyone can create value 0.856¤¤
Target customers where we have competitive advantage 0.555¤¤
Discussion about competitors’ strengths and strategies 0.613¤¤
(continued on next page)
552 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558

Appendix 2 (continued)

Constructs and items ConWrmatory factor analysis Cronbach

First-order Second-order alpha
loadings loadings
Creation of greater value for customers 0.829¤¤
Visit of current and prospective customers 0.847¤¤
Entrepreneurship 0.363¤¤ 0.72
¤¤
Wide-ranging acts are necessary to achieve objectives 0.448
Initiation of actions to which other organizations respond 0.723¤¤
Strong proclivity for high risk projects 0.866¤¤
Dramatic changes in products 0.970¤¤
New lines of products 1.023¤¤
First business to introduce new products, techniques, etc. 1.114¤¤
Cautious, “wait and see” posture 0.537¤¤
Adopt a very competitive, “undo-the-competitors” posture 0.482¤¤
Gradually explore the environment, cautious behavior 0.423¤¤
Innovativeness 0.331¤¤ 0.72
¤¤
People are penalized for new ideas that don’t work (R) 0.341
Innovation is readily accepted in program/project management 0.964¤¤
Technical innovation (research results) is readily accepted 0.913¤¤
Innovation is perceived as too risky and is resisted (R) 0.636¤¤
Management actively seeks innovation and ideas 0.871¤¤
Organizational learning 0.668¤¤ 0.79
¤¤
Ability to learn is the key improvement 0.822
Basic values include learning as a key to improvement 0.991¤¤
Once we quit learning we endanger our future 0.801¤¤
Employee learning is an investment, not an expense 0.899¤¤
Goodness-of-Wt of the model: 2(428) D 1109.828; p < 0.001; NNFI D 0.934; CFI D 0.939; RMSEA D 0.066
Scale: 1 D not descriptive to 7 D very descriptive.
Note: ¤ SigniWcant at the 0.05 level; ¤¤ SigniWcant at the 0.01 level.
Organizational performance
Please rate the performance of your organization against initial expectations on each of the following dimen-
sions for the past 12 months
Constructs and items ConWrmatory factor analysis Cronbach alpha
First-order loadings Second-order loadings
Organizational performance n/a 0.81
Sales volume 0.751¤¤
Return on investment 1.351¤¤
ProWt 1.515¤¤
Goodness-of-Wt of the model:  (1) D 0.157 p D 0.692; NNFI D 1.0; CFI D 1.0; RMSEA D 0.0
2

Scale: 1 D not at all satisfactory to 7 D outstanding.

Note: ¤ SigniWcant at the 0.05 level; ¤¤ SigniWcant at the 0.01 level.
 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
Appendix 3. Validation of constructs (procedures and tests)
Procedure/test
Content • Use of existing and validated scales
validity • Pre-test of the questionnaire in three
steps: (i) several academics were asked
to revise the questionnaire; (ii) three top
managers were interviewed and asked to
complete the questionnaire; (iii) the
questionnaire was completed by a group
of MBA students
Convergent • Validation of the four capabilities leading
validity to positional advantages based upon
diVerentiation with a complementary measure
of strategy (instrument of Govindarajan, 1988)
where the higher the score, the more the Wrm
follows a diVerentiation strategy
Discriminant • Examination of discriminant validity
validity between the two dimensions of PMS, and
among the four dimensions of capabilities,
with a series chi-square diVerence tests between
two dimensions at a time by constraining the
estimated correlation parameter to 1.0
(Anderson & Gerbing, 1988). A signiWcant
lower 2 value for the unconstrained model
provides support for discriminant validity
Interrater • Duplicate surveys sent to a second respondent for • Validation sample includes 21
reliability the Wrms which have originally returned the ques-
tionnaire
• To assess the interrater agreement, the average
deviation index is calculated (AD) (Burke,
Finkelstein, & Dusig, 1999). The criterion for
acceptable interrater agreement and practical
signiWcance is estimated at 1.2 (Burke &
Dunlap, 2002). The criterion is approximated
as c/6, where c is the number of response options
for a Likert-type item
• T-tests to determine whether the mean ratings
provided by the Wrst respondent for each
constructs were signiWcantly diVerent frrom the
mean ratings of the second respondent
553
Results
Adjustments were made in terms
of wording and presentation
Positive and signiWcant correlation
coeYcients at the 0.01 level between
strategy and the four capabilities:
• Market orientation: 0.370
• Entrepreneurship: 0.414
• Innovativeness: 0.285
• Organizational learning: 0.240
For every pair of dimensions
tested, the unconstrained model
provided evidence of discriminant
validity (p < 0.01)
Wrms
• For all constructs in the validation
sample, the AD was 0.33 ranging
from 0.20 to 0.73 for each Wrm,
and from 0.23 to 0.42 for each
construct
• The results did not reXect signiW-
cant mean diVerences for any con-
structs (p > 0.05) between the Wrst
and second respondent
(continued on next page)
554 J.-F. Henri / Accounting, Organizations and Society 31 (2006) 529–558
Appendix 3 (continued)
Procedure/test
• T-tests and chi-square analyses to compare
the mean ratings of constructs and
sample characteristics (size, industry,
location) of the Wrms having two
respondents with those of the Wrms
having one respondent
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